The author analyzes the economic problems of three important Latin American nations, with special reference to his native Argentina. Few if any specialists in these questions are better qualified to discuss them than Sr. Baldinelli, a former cabinet-level official and ambassador, now director of a major private-sector banking institute. (See the article in the original Spanish in this issue of the journal.)Ed.

In the world economy today, there are reasons for concern in several countries. Things are not going well in the more powerful ones, such as the United States, German, and Japan, but there are also serious problems in South America, notably in Argentina, Brazil, and Uruguay. In the cases of those three countries, their problems cast doubt on the relevance of the economic policies which have been recommended to them by the United States and world credit organizations supposedly as policies to allow them to get out of their present situation of stagnation, poverty, and inequity. Nevertheless, it must be acknowledged that current reality in Latin America is not uniform, and the situation in each country is different.

In the world today, there are twelve countries with external debts above $15 billion. Of these, Egypt is in the least favorable position to be able to meet its payments through its exports, since it would take six and one-half years of exports to cover the external debt. Then comes Argentina, with foreign debt equal to about five and one-half years of exports; Syria, with more than five years; Brazil, with almost four and one-half years; and Peru, with a bit more than four and one-half years.There follows a group of countries whose foreign debt is over three years of exports, including Uruguay.

Many indicators are used to measure a countrys economic situation, but in the present case, the relation between external debt and exports is adequate. Of the three countries we are concentrating on, the one with the least serious problem is Uruguay, followed by Brazil and Argentina.

Uruguays ProblemsThe relationship between foreign debt and exports should not have caused Uruguay to have the problem it is facing. Although the government budget has been in deficit, the moderate external debt is not sufficient to cause a crisis. In addition, this is a country which has always had good macroeconomic policies and, above all, it has not suffered from the scourge of corruption

Montevideo

Its problems arose from the collapse of its close neighbor, Argentina. A banking crisis came about because the Central Bank made the mistake of not acting as lender of last resort at a time when some banks, established in Uruguay but foreign owned, mostly by Argentines, fell into difficulties. When this happened, both Argentine and local depositors started a run on the banks, which spread through the entire financial system. If, when the first bank fell, the government had taken measures to prop it up, nothing bad would have happened. Now, with international help, Uruguay will surely recover from a problem that should never have taken place. However, it will have lost, for many years, the possibility of gaining deposits from abroad, especially from Argentina, since in such cases, it takes years to regain lost confidence.

The Crisis in BrazilThe case of Brazil is different because, as mentioned above, it is one of the worlds most indebted nations relative to its exports. In addition, its economy has been stagnant for the last three years and it has not been able to find the pathway to renewed growth. The origin of the crisis is in the fact that a presidential election will be held in October of this year, and the candidate chosen by the current president, Fernando Henrique Cardoso, is running well behind the two leftist candidates. Investors are worried about this, and the value of the currency has fallen while interest rates have risen.

Rio de janiero

Apparently Brazil is about to replace a very efficient president and his administration with another, which appears not be so. But in the opinion of an IMF official, the government nevertheless will be able to count on a competent technical team, and a presidential candidateLulawho is now appearing more trustworthy. Also, Brazil has complied strictly with the agreements negotiated with the IMF since 1999. And, although much capital has left the country, this is due in large part to payments by local companies to foreign banks to cover lines of credit which would normally have been renewed.

Furthermore, in Brazil there are no states that print bonds which then circulate like money, as is done in several Argentine provinces. Also, Brazil produces one of the worlds best aircraft. It is so good that its competitors in the industrialized countries have tried to eliminate the competition by putting up tariff barriers. In addition, nowas opposed to three and one-half years agothere is a flexible exchange rate and an undervalued currency.

In recent months, as the waves from the collapse of Argentina were beating against its neighbors, governments in that part of the world were becoming exasperated at the apparent indifference of the wealthy countries to the fall of the regions currencies and the the declining economic confidence. But at the beginning of August 2002, everything suddenly changed. The IMF announced a large new line of credit for Brazil: $30 billion to be released gradually over the course of the next year and a half. Several days before, the United States had made an emergency advance of $1.5 billion to Uruguay to keep its banks afloat.

The Situation in ArgentinaThe most serious problem in Argentina is that it, aside from Egypt, has the worlds worst relationship between external debt and annual exports, amounting to five and one-half years of exports. Also, the economy has been depressed for four years. this high indebtedness and the consequent economic crisis has cultural roots. In the second half of the nineteenth century, technical advances in both land and maritime transport allowed the grain and meat production of its fertile pampas to have access to the markets of European countries, which were then incapable of supplying their own food needs, but could afford the import food. Argentina enjoyed the worlds seventh highest per capita income. It also gave rise to the false but widespread impression that the abundance of natural resources guaranteed permanent prosperity independent of the efforts of the people.

Buenos Aires

But new technological changes that occurred after World War II gave rise to a strong increase in agricultural production as a result of the use of agricultural chemicalsfertilizers, insecticides pesticides, etc. These changes made it possible for Europe not only to supply its food needs but, through subsidies, to dump its excess production of grains, milk products, and meats onto the world markets. These new circumstances put an end to Argentinas economic prosperity. But the worst was that Argentina never fully assimilated the consequences, always hoping that one day subsidies would be prohibited and foreign markets would again be open. In hopes of the return of the good old days, exports of new products were not encouraged, with the result that today only thirty-two percent of Argentinas exports are manufactured products, compared with thirty-eight percent of Uruguays and fifty-four percent of Brazils.

In addition, Argentina did not resign itself to living in accordance with its reduced possibilities. During the decade of the 90s, a standard of living was maintained that gave rise to additional indebtedness of $70 billion, while at the same time spending the equivalent of $30 billion received through the sale of state-owned enterprises. Thus, along with the disappearance of new foreign credits, the crisis arrived.

The most serious problem for the country is not the economy, but is more closely tied to the collapse of the working of the system of justice and the growing insecurity of the citizenry because of increased criminal activity. Before World War II, Argentina had adequate legislation and an efficient justice systemso good that with a perhaps slight exaggeration the people of Buenos Aires called their police the best in the world. Beginning with the Peron government, all succeeding governments have changed the composition of the Supreme Court of Justice; the nomination of justices leaves much to be desired; cases are resolved slowly, and with increasing frequency the executive and the legislature disregard agreements made between the parties.

The origin of the worrisome increase in crime is related to changes in the penal code. This used to be adequate, but violations of human rights committed by security forces in the repression of guerrilla activities in the 70s led to changes. Meanwhile, in the Scandinavian countries a theory was developing according to which penal legislation was basically contrary to individual freedom, and therefore its scope should be minimized. Holland and France were going in the same direction, but retreated when it became obvious that with their crime rates being higher than in Scandinavia, control of crime was being lost. It was at about this time that changes in the Argentine penal laws were being considered, and it was decided to go for more permissive laws, acting as good disciples of our Northern European teachers. This phenomenon began in 1984 and has steadily increased since the. Of course, the situation was not helped by the unemployment and poverty that came with the crisis, but all these to make our level of crimewhich was at European levels only a few years agothreaten to become of the worst in the region.

Besides all this, we have two economic problems. The first arises from the long-standing tendency of Argentines to deposit at good part of their savings abroad. This has been greatly increased by the reaction against the measures taken by the government to stop the run on the banks by limiting access to bank deposits. The other problem is persistent tax evasion. It has been estimated that this approaches forty percent of income taxes and thirty percent on the Value-Added Tax. Thus, the government of Argentina has been able to collect taxes equivalent to only fifteen percent of GDP, whereas Brazil collects thirty percent.

The magnitude of the crisis is broad and deep, but there are facts which permit us to take an optimistic view of the countrys future. In the first place, even though several heads of state have departed prematurely, democracy still standsand there will be presidential elections in early 2003. The outbreaks of violence that occurred at the end of 2000 have ceased without the security forces having to use excessive force. And the government grants a small monthly benefit to the unemployed, which lessens the suffering of the impoverished.

Though the devaluation of the peso was done at the worst possible moment politically and was poorly managed, some advantages could arise in the future from breaking parity with the dollar. In the past, there were many devaluations of the currency coming so close together that they produced no lasting effect on the economy. The difference with todays situation is that the peso is strongly undervalued and will stay that way for a long time, for the simple reason that Argentina is unlikely to receive either direct capital or portfolio investments.

This favorable exchange rate situation, if it could be maintained for a decade, could give rise to what Argentina badly needs: growth and diversification of its exports and adding more manufactures and services to the existing primary products.

Concerning possible economic integration with the United States and/or Europe, there was concern over the years that if Argentina eliminated its tariff barriers while maintaining a one-to-one exchange rate with the dollar, some important sectors of production could face problems which the government would have no tools to deal with. With the return to a flexible exchange rate, it will be possible, if necessary, to defend endangered sectors by devaluing the currency. Of course, none of this means that Argentina will not have to suffer many years of economic recession. This is the consequence of having lost the confidence of savers, but it is the only path to correcting the problems which until now have limited the development of our creative energy.

For all these reasons, the crisis that now affects the countries of the Southern cone must be solvedsome sooner and some laterand indications are that this can be accomplished without damage to the present democratic order.

The Consensus of WashingtonA decade ago the U. S. government assured the nations of Latin America that, if they opened their markets to foreign competition and private capital, deregulated the economy, eliminated fiscal deficits, controlled inflation, and privatized state enterprises, they would experience a great economic resurgence. These policies were an attempt to apply to this part of the world what the United States did with the Marshall Plan in Europe after World War II. But the earlier success was not repeated. Argentina, Brazil, and Uruguay are in a crisis. Mexico and Brazil, which until some months ago were seen as success stories, now find that their per capita income is only slightly higher than in 1980. In Latin America, overall economic growth in the decade of the 90s was slightly more than half of the growth rate in the period prior to the reforms. What is worse is that the fruits of reforms ended up mostly in the hand of the rich, while many poor people found their situations worsened.

One consequence is that the Left is gaining strength in Brazil and other countries in the region, and it should not be surprising that people in these countries are tired of hearing calls for austerity and discipline. Nor should it be surprising that Latin American leaders are moderating their enthusiasm for free markets and are emphasizing protection of workers and the poor. There is no doubt that some responsibility for this failure rests with the Latin American governments. Brazil, Uruguay, and Argentina have run large fiscal deficits in the last decadefor Argentina, an annual average of three percent, and for Brazil, five percent.

However, something else has happened. The recommendations of the consensus were based on the belief that if they were strictly adhered to, a country would rise from poverty to abundanceand this doesnt happen. No one can pretend that applying liberalizing principles to a country of Sub-Saharan Africa is going to result in growth and prosperity. No matter how much markets are opened, productive activities capable of competing in foreign markets will not arise from an environment in which ignorance and lack of discipline prevail. If there is unemployment before applying these policies, it will only get worse when public enterprises are privatized.

These policies work well in countries with educated and efficient populations; but even highly industrialized countries maintain protection and subsidies for such sectors as agriculture, textiles, and steel. The countries of Latin America are not at either extremeSub-Saharan Africa or the developed countries. So the liberalizing policies did not produce the miracle that many economists had predicted. Freer international trade is not sufficient to ensure that the benefits of economic prosperity are extended equally to all countries. The best results are obtained by those countries that achieve an efficient economy. Unless more goods and services are produced with the same number of man-hours of work, a country will not increase its standard of living. That is called an increase in productivity.

At the end of World War II, the United States put into effect the Marshall Plan in Europe. The results obtained by the injection of financial resources were not only very effective, but very rapid. In only a few years, the economies of the countries affected by the war were on a new footing. But the key to these successes lay in the fact that there was something there that the bombardments had not destroyed and that explains the rapidity of the recovery of Germany and Japan: the high level of education of the employees, the necessary technology, and the attitude toward work.

Beginning with the decade of the 60s, the United States tried something similar with respect to Latin America, but the results were not so positive. Several things were lacking, varying from country to country, but the basic lack was human capital because of insufficiency of education. The, in the decade of the 70s, the countries of this continent accepted enormous amounts of credit from banks and other financial institutions. Identical causes led to the same consequences: very heavy indebtedness. The mistake was in thinking that all that was needed was money to build factories and buy equipment, when what was lacking was less tangible resources. In Europe and Japan, these resources were presentall that had to be done was to build the factories.

All these experiences lead to the conclusion that economic policy recommendations should be tailored to the situation of each country. The combination of less rigid policies in Latin America together with a reduction of tariffs by the United States would bring enormous political and economic benefits to the region. This would be the Good Neighbor Policy for the new era, and would reduce the need for loans, which are as vexatious for those who provide them as for those who receive them. The recent Congressional authorization for the President to negotiate a hemisphere free trade area is a good step in that direction.

September 5, 2002

Elvio Baldinelli is a former secretary of state for foreign commerce in Argentina. Currently he is director of the Bank of Bostons Institute for Sectoral Development of Argentine Exports.